Real Estate Bulletin - Winter 2017/18

Welcome to the Winter edition of the Real Estate Bulletin.

This quarter, we look at cases involving development obligations, easements and the ancillary rights that go with them and how not to save the village pub from closure. For landlords and tenants, we look at licences to occupy and opposing renewal leases on the redevelopment ground. The planning point covers the topical and controversial issue of basement developments and in the tax tips, there are two conflicting decisions on the VAT treatment of converted dwellings.

The Bulletin brings together highlights from our popular quarterly update training sessions, so if you are local to the East Midlands or pass through every now and again and would like details of our next event in March, please please get in touch.

CASE LAW UPDATE

Development - overage/Section 106 Agreements: Minerva (Wandsworth) Ltd v Greenland RAM (London) Ltd Key points:

• In certain contexts, the behaviour of parties to a contract is governed by statute
• Where legislation does not impose restrictions or timescales, the parties are bound by common law principles

M obtained planning permission to develop a site, to include a 34 storey residential tower. M also entered into a Section 106 agreement, requiring affordable housing provision within the development.M then sold the site to G for £136 million. As part of that deal, M was entitled to apply for an enhanced planning permission for the development and to receive overage payments if the permission was granted.M was required to get G's approval of its planning application before submitting it. G was required not to unreasonably withhold approval and to enter into a revised Section 106 Agreement if certain conditions were satisfied. One of those conditions was that M would use reasonable endeavours to minimise the amount of affordable housing required.

M sought, but did not manage to obtain, G's approval on two occasions, then proceeded with its planning application and got the enhanced planning permission conditional on G entering into the revised Section 106 Agreement. G refused as it contained increased affordable housing requirements. M brought proceedings on the basis that G had unreasonably withheld approval to the planning application and that G was obliged to enter into the Section 106. After a long trial, M was successful and was awarded damages of almost £4 million.

Practical implications:

This case also looked at whether M had used its 'reasonable' endeavours, which has always been a topic for dispute. If entering into such obligations, remember this requires behaviour consistent with that of a reasonable and prudent person acting properly in their own commercial interest. 'Best' and 'all reasonable' endeavours mean different things again, and have different implications for the person entering into the obligations. Wherever possible when negotiating deals, try to agree the specific steps each party must take and the timeframe for doing so.

Easements - lost modern grant: Welford v Graham Key points:

• There are different ways of establishing easements have been acquired through long use (called prescriptive easements)
• Any such easements will be limited in extent and nature to the actual rights that have been exercised over the years

W applied to register a prescriptive easement at the Land Registry. The right claimed was a right of way over a yard (owned by G) with or without vehicles for access to and egress from the rear of W's property. At the time of the application to the Land Registry, W wasn't in fact using the right, but W claimed that the right had arisen because the people who owned the property previously had done so. G objected to the registration of the right over its yard.The matter was referred to the First Tier Tribunal to resolve, which found that there was insufficient evidence to determine that the use of the right of way had been without G's permission (a key requisite for a prescriptive easement is that it is exercised without permission). W appealed and was successful. The right over the yard had been exercised openly and without interruption for a sufficient period of time and G had not produced any evidence that rebutted the presumption that the use was 'as of right' (i.e. exercised without force, secrecy or permission). W was able to register a right against G's title, although the Upper Tribunal directed that this be limited to the extent of the actual user. In this case, the right was not used 'at all times and for all purposes' which is something you often see on a title but was linked to W's use of the benefiting property as a joinery workshop.

Practical implications:

If you are seeking to rely on the Prescription Act 1832, or indeed if someone is seeking to rely on that Act to register rights against your title, there must have been 20 years' continuous use up to the date of the claim.

However, the 'doctrine of lost modern grant' can be a useful way of establishing an easement if there has been an interruption of the use of the right in question.Remember that where you are able to establish an easement through long user, that right will be legally binding forever, but will not be unlimited. The right will be limited to the extent to which it has been used over the years.

Easements - implied ancillary rights: Dickinson v Cassillas Key points:

• Even rights that are expressly granted are not always without their problems
• The courts will not allow you to give with one hand and take away with the other

D and C were neighbours living in adjoining detached houses. They didn't get on. Problems began in 2003 when D installed a locked gate that meant C could not get access to the flank wall of her property, which she needed to do to read her gas and electricity meters and to inspect the condition of the wall. Things deteriorated further in 2007 when issues arose about a porch, some 'decorative features' and overhanging gutters!

The transfer of her house to C from the developer did include various rights, including the right to erect and maintain gutters and downspouts, which could overhang and discharge surface water onto adjoining land and the right to enter adjoining land for maintenance (although not expressly inspection) purposes. The transfer did not mention a right to read the meters. C applied to the court for a declaration as to the extent of her rights and for an injunction preventing D from interfering with them. C was successful in the first instance and in the Court of Appeal.

Practical implications:

It is important to look at the wording of a transfer or other document that grants express rights, but that may not be the end of the story. Remember that express rights include ancillary and incidental rights that are reasonably necessary to make the grant effective - the courts will not allow a party to stick to the letter of the grant if the other party cannot actually make use of the rights it has been given.

The Court of Appeal also took the opportunity to reiterate judicial thinking on neighbour disputes. C's legal costs, which D had to pay, came to around £200,000 by the end of the proceedings. The Court said 'where most neighbours would have found a sensible solution to the problems that arose between them, [D] took their stand on what they considered to be their strict legal rights. To their great cost, they were wrong about those rights!'.

Restrictive covenant - modification: James Hall and Co (Property) Ltd v Maughan Key points:

• Where land is burdened by restrictive covenants, a landowner can make an application for the covenant to be modified or discharged if certain criteria are satisfied
• A key issue is whether a covenant secures a practical benefit for anyone who objects to the modification or discharge

The Aclet is a public house in Bishop Auckland. It is built on land that is subject to a restrictive covenant imposed by the then local authority when it sold the land in 1966. The covenant restricted the use of the land to 'the business of a Hotelier and licensed victualler'. The covenant also specifically prohibited use for a shop, trade or business.

The pub had a loyal customer base, but was not profitable. Its high overheads and running costs meant the level of investment needed to bring it up to standard was not justified by the likely profits, so its owner intended to dispose of it.

After a period of around six years, during which the owner was unable to generate any interest from other pub operators, it took the decision to sell the property to J. J wanted to convert the property into a SPAR convenience store. Clearly the 1966 restrictive covenant was a problem and the sale contract was conditional upon J getting the restriction released.J submitted an application to have the covenant discharged. The application was originally met with over 200 objections, although ultimately, only four local residents provided evidence that they were entitled to the benefit of the covenant and therefore to object to its discharge. The objections were based on grounds that the pub was the centre of the community and provided a valuable social network for many residents that would be lost if the restriction was discharged.

A representative of the company that owned the pub gave evidence to the Upper Tribunal that if the covenant was not discharged, the property would remain on the company's disposal list and would most likely close and have to be boarded up. An application to have the property listed as an Asset of Community Value was submitted to the council in 2015, but had been withdrawn.

The Upper Tribunal found that J's proposed use of the property was reasonable and that this use was impeded by the covenant. J argued that the covenant did not 'secure…any practical benefits of substantial value or advantage' for the objectors, particularly because the pub was not doing very well and was likely to be closed down in any event.

The Upper Tribunal did not feel able to discharge the covenant altogether, as this would leave the site vulnerable to any sort of development (subject to planning consent) if the sale to J didn't go ahead and the SPAR was not actually built. Instead, the covenant was modified so as to enable the change of use from a pub to a shop.

Practical implications:

The difficulty the objectors had in this case was that they were trying to rely on a negative covenant to achieve a positive result (i.e. to keep the pub open). The pub's current owner could simply close it down and would not be in breach of the covenant. Whilst this would have a negative impact on the local area, that is not what this particular covenant was designed to achieve.

For an objection to an application for modification or discharge of a covenant to succeed, objectors must identify a practical benefit that itself is in consequence of the restriction. If such benefit can cease without breaching the covenant, then it will not be a practical benefit of the covenant.

LANDLORD AND TENANT ROUND UP

Licence to occupy - termination: West End Commercial Ltd v London Trocadero Key points:

• In order to show that a contracting party is 'estopped' from behaving in a particular way, the aggrieved party must show that the other party made a representation or gave an assurance that the aggrieved party relied on to its detriment
• Estoppel only arises if the aggrieved party has a proprietary, rather than a personal, interest in the property in question

In July 2016, L granted a company licence to occupy a retail unit. The licence period was one year. L was entitled to terminate the licence on 30 days' notice, although not within the first six months, unless there was a breach of the licence agreement.

After a year, the licence was renewed, although the occupier was a different, but related, company (W). The renewal licence did not contain the same provisions restricting L's ability to terminate during the first six months. Not long after the licence was renewed (only six days later), L served notice to terminate as L had found a new occupier (H) who wanted to occupy the unit from August to November 2017 and who was prepared to pay more than the significant licence fee W was paying.

W obtained an interim injunction preventing L from interfering with its occupation of the unit. W sought to rely on an estoppel argument - it said that during negotiations for the renewal licence, L's agent had given assurances that L wouldn't look to terminate the licence in the first six months, as long as W complied with the terms, so L was estopped from terminating the agreement.L appealed against the injunction, which the High Court agreed to lift.

Practical implications:

In order for an estoppel argument to succeed, there must be "a representation or assurance made to the claimant; reliance on it by the claimant; and detriment to the claimant as a result of his (reasonable) reliance". In this case, there had been no clear evidence of an assurance and the judge was not convinced that by entering into the second licence, W had in fact suffered detriment.

Remember also that estoppel only operates where a party has an interest in the property owned by the defendant. In this case, W was merely a licensee, not a tenant or a buyer and was therefore in a precarious position throughout. If you have any issues relating to occupation of property, whether you are an owner or an occupier, please contact a member of our Real Estate Litigation Team.

One other point arose, which may have made W feel slightly better: the renewal licence granted to H described the licence fee as 'one peppercorn per annum' but L and H also signed a side letter, which detailed the amount H had actually agreed to pay. The side letter stated "that dilapidation has accrued at the property during the course of occupation in the sum of £657,123.29 ("the Dilapidation"). Given the Occupier's inability to pay the Dilapidation immediately, the Owner agrees to accept equal weekly instalments of £50,000 until the Dilapidation has been cleared, the first instalment of which shall be made on 14 August 2017". Curious as to how L and H could see into the future and predict (down to the last 29p) how much the dilapidations to the unit would be, the judge described the arrangement between L and H as a sham and referred the matter to HMRC, as a potential VAT fraud (because whilst licence fees are subject to VAT, dilapidation payments are not!

)Lease renewals - opposing on grounds of demolition or reconstruction: S'Franses Ltd v The Cavendish Hotel (London) Ltd Key points:

• To oppose a lease renewal on ground (f) (the redevelopment ground) landlords need to establish an intention to redevelop
• Motive is not relevant, unless it can be shown that it undermines the genuineness of the landlord's intention

S occupied the ground floor and basement of premises in Jermyn Street from where it operated a textile dealership. C, the landlord, occupied the rest of the building and ran a luxury hotel. S wanted a new lease and served the necessary notices under the 1954 Act, but C served counter notices, relying on Section 30(1)(f) (the redevelopment ground). C proposed redevelopment works that had in fact been designed specifically to satisfy ground (f) and prevent S from renewing its lease. C even said that if S left the premises voluntarily, it wouldn't carry out the works.In order to reinforce its intention and to remove S from the premises, a director of C gave an undertaking to the court that C would start the works as soon as S vacated and would proceed diligently to get them finished. This was enough to convince the County Court judge that C had made out ground (f), but S felt that C's intention was not genuine and appealed to the High Court. Unfortunately for S, the High Court did not agree. Regardless of motive, C had provided evidence of intention and of its genuineness.

Practical implications:

Whether you come at lease renewals from position of landlord or tenant, provided there is sufficient evidence of what redevelopment is proposed and there is a genuine intention to proceed, a renewal lease may not be forthcoming.

As a landlord, you would then need to get on with things once the tenant had moved out (especially if you've given an undertaking to the Court, breach of which would put you in contempt) and as a tenant, you'd need to start looking for new premises!

Note that this case has been 'leap frogged' to the Supreme Court, so this won't be the last we hear of it and we will update readers once the appeal has been heard in October 2018.

PLANNING POINTS

Listed building consent - meaning of "lawful": Government of the Republic of France v Royal Borough of Kensington & Chelsea Key points:

• It is possible to obtain a certificate of lawfulness from the local planning authority that alterations or extensions to a listed building do not need listed building consent in certain circumstances
• Works are lawful if they do not affect the character of the listed building as a building of special architectural or historic interest
• Most full planning permissions are subject to a condition that the development must be started within three years from the date of the permission. If this period expires, a new planning permission is needed and it may not always be easy to get this

10 Kensington Palace Gardens is a grade II listed building. In 2008 after several attempts, H, the leasehold owner, obtained planning permission and listed building consent to redevelop the property (including excavating the basement to five storeys, although subsequently this was revised to a slightly smaller scale project!). The works had to be started within three years. In July 2011, H carried out some internal works to the property.In 2015, H applied for a certificate of lawfulness of proposed use or development (CLOPUD) and, under the Planning (Listed Building and Conservation Areas) Act 1990, a certificate of lawfulness of proposed works. H wanted confirmation from RBKC that the works that had been carried out where sufficient to have implemented the planning permission and the listed building consent, such that they did not lapse, and that the rest of the proposed works could be lawfully completed.

RBKC granted the CLOPUD and the certificate of lawfulness in April 2015. Therefore, the permissions had been implemented in time and the remainder of the works could be carried out. So far, so good for H. However, next door to Number 10 lived the French Ambassador, who applied for judicial review of the grant of the certificates. The Court discerned that the real objection was to the grant of the consents in the first place on the basis that the works would have an adverse effect on the Ambassador's ability to conduct state affairs which are dependent on the facilities at the Ambassador's residence, but the application was for judicial review of the certificates, not the original permissions, and that is what the Court had to consider.

The Court upheld the CLOPUD but quashed the certificate of lawfulness because such a certificate can only be used to certify that proposed works to a listed building would not affect its character as a building of special architectural or historic interest. It is not to be used to verify that a listed building consent has been lawfully implemented or remains extant.

Practical implications:

Local planning authorities should take care not to exceed their powers when dealing with applications for certificates and should look carefully at the wording of the relevant statute.

Developers should take note that, when dealing with listed buildings, there is no equivalent to a CLOPUD and no way of obtaining confirmation that a listed building consent has been lawfully implemented. Ensure that works are started within the period specified in any such consent and that the works are as per the consents.

Note that there is no statutory or other duty on a local planning authority to consult a neighbour on an application for a lawful development certificate, so any objections to nearby schemes should be raised as part of the initial planning application.

TAX TIPS

VAT - zero rating on dwelling conversions: DD & DM MacPherson v HMRC; Languard New Homes Ltd v HMRC Key points:

• The first grant by a person converting a non-residential building or non-residential part of a building into a dwelling is zero rated for VAT purposes
• If the building already contains a residential area, this first supply of any conversion that includes that area will not be zero rated
• The VAT rating is important for those who want to recover VAT incurred when carrying out conversion works

Two joined cases were heard by the Upper Tribunal after decisions made by the First Tier Tribunal (FTT) were challenged by the taxpayers involved.M had bought a property which had a commercial area (a village shop) on the ground floor, with living accommodation on part of the ground floor and on the first floor. M converted the property into two semi-detached dwellings, both of which took in areas that had previously been the commercial area and the living accommodation.

L had bought a former pub, which as is common, had the commercial space on the ground floor and living accommodation on the upper floors. L converted that property into four maisonettes. The two lower maisonettes included the ground floor (so previously commercial) and part of the first floor; the two upper maisonettes took in the second floor and parts of a newly-built third floor.

Both M and L sold their respective converted properties and sought to zero rate the sales. HMRC said the supplies were not zero rated and the two taxpayers appealed to the FTT, although L did concede that in relation to the upper maisonettes, these should not be zero rated, as the area converted had always been residential.

Unhelpfully, the two differently-constituted FTTs came to different decisions, finding in M's case that the sale of the two semi-detached dwellings were not zero rated and in L's case, that the sale of the maisonettes was zero rated. The parties appealed to the Upper Tribunal, which found that neither sale could be zero rated because both lots of converted dwellings included areas that had formerly been residential.

Practical implications:

There are a lot of cases about the circumstances in which zero rating applies, which shows how complicated it is! It's likely that this decision will be appealed again, at which point, hopefully the Court of Appeal will provide some clear authority that will be binding on the tax tribunals.

The interpretation applied to the legislation by the Upper Tribunal was restrictive and is likely to have an impact on many conversion projects, particularly those involving former public houses. For now, developers should take account of the previous uses of different parts of the buildings they are looking to convert and assess the likely impact of the tax treatment on subsequent sale.

Contact a member of our Tax Team for more information.